Muted Response to the Historic US Tax Bill

The big news overnight saw the US Senate pass the most extensive overhaul of US tax in more than three decades. The bill must return to the House later today for one final vote before President Trump signs into law. The bill slashes the corporate tax rate to 21 percent from 35 percent, enhancing the U.S. position against other industrialised economies, which have an average corporate rate of 22.5 percent. It offers an array of temporary tax breaks for other types of businesses and for individuals — including rate cuts that will tend to favour the highest earners. Most middle-class workers will also get short-term relief, but independent analyses show the amounts aren’t large.

Earlier in the day, we had more Brexit news flow, the ever hot political topic. PM Theresa May presided over a discussion with her Cabinet yesterday to flesh out her vision of an end state, aiming for a “significantly more ambitious deal” than a pact in place between the EU and Canada. That sets the stage for a contentious year of talks given that the Canada model – which was seven years in the making – is exactly what the EU wants to offer given May’s stated red lines. However, prior to that the most telling news came from a round of interviews by the EU’s chief negotiator, Michel Barnier, in which he underlined the bloc’s determination not to let the U.K. enjoy the benefits of membership after Brexit without the obligations of a member state. Most tellingly, Barnier, who is due to speak again later today, has explicitly ruled out a special deal for Britain’s financial services sector and said the decision to leave the EU single market rules out passporting arrangements that allow U.K. financial services companies to trade in the EU.Despite the above big political stories, markets continue to be range bound and for FX in particular in very tight ranges as the Christmas break fast approaches. Any feel good factor from the tax bill was short lived in the equity markets with the DJIA closing down 0.15% and the NASDAQ 100 also down 0.5%. So far this morning in Europe I’m seeing a mixture of red and green across the different equity markets, however in fitting with the range bound point, all only showing marginal losses or gains.

Currency wise there is even less to report. The main looser on the day was probably the pound in response to Barnier’s comments over passporting rights. However, all previous levels highlighted remain firmly in place. For EURGBP topside remains at .8862 (GBPEUR 1.1284) while initial support at .8760 still holds with .8730 firmer below. As stated yesterday, “GBPUSD continues to see support ahead of 1.3300, while resistance to moves higher should hold ahead of 1.3500 area”. EURUSD is trading higher this morning after the muted response to the tax bill developments, hitting highs at 1.1856. We expected the tight 1.17-sub 1.20 range to remain in place until year end. Monday’s low of 1.1777 will act as the first line of support.

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